Agefi Luxembourg - décembre 2024

AGEFI Luxembourg 14 Décembre 2024 Economie / Banques T he business delegation from theChamber of Commerce came back toChina for the first time since 2019. The Official TradeMission to China took place on 23-30November 2024 in 3 cities: Beijing,ShanghaiandHangzhouandwas headed by Xavier Bettel, Vice Prime Minister,Minister for ForeignAffairs and ForeignTrade, LexDelles,Minister of the Economy, SME, Energy and Tourism, and Fernand Ernster, President of the Chamber of Commerce. This mission aimed to showcase new opportunitiesforcollaboration,especially, in the identified sectors of Logistics, Automotive, and CleanTech. The trade delegation was composed of 35 Luxembourg companies with over 60 participants, reflecting the strong interest of the Luxembourg business community in the Chinesemarket. The programme of the mission included variousagendapoints.InBeijing,thebusi- ness delegation visited the China International Supply Chain Expo, where the company IEEwas exhibiting. The Luxembourg-Chinese Business Forum hold in the framework of this Expo featured opening remarks of Lex Delles, Fernand Ernster and Zhang Shaogang, ViceChairmanCCPITChina, aswell as engagingdiscussions centered on Logistics and Supply Chain – key areas for both, Luxembourg and China. Mr. Ernster noted in his opening remarks that “themain sectors identified for this mission (Logistics and Supply Chain, Automotive and CleanTech) per- fectly reflect the agenda of the Expo, which is more than just a platform for discussions, but a place for innovative solutions“. CargoLux and POST provi- ded their testimonials on the cooperation opportunities in China. Upon the arrival of Luxembourg’s offi- cial and business delegations in Shanghai, the second Luxembourg- China Business Forum kicked off on Wednesdaywith opening remarks from Minister Bettel, Minister Delles, andMr. Ernster. President Ernster referred to the enhancement of our trade relations fol- lowing the World Expo Shanghai in 2010, which served as a springboard for deepening economic ties. Back then, the Luxembourg pavilion welcomed over 7 million visitors, offering them a glimpse into Luxembourg's openness, dyna- mism, and reliability. The programme of the day included the SigningCeremonyofMemorandums of Understanding between Luxembourg and Chinese companies in the 3 identi- fied sectors, a seminar on Automotive and CleanTech, and pre-organised B2B meetings. This busyday concludedwith the Official reception which brought together over 200 participants fromboth the Luxembourg and Chinese business communities. Overall,thisone-weekprogrammeforthe business delegation included a wide range of company visits in Beijing, Shanghai and Hangzhou, where Luxembourg companies could explore partnershipsandnewcooperationoppor- tunities. The visits to Chinese companies likeHuaweiandAlibaba,andtoindustry leaders like iflyteckandPingPong, provi- ded firsthand insights into China’s cut- ting-edge sectors. The delegation visited the Shanghai InternationalAutomotive City, exploring the avenues of cooperation in the auto- motive sector, which included the visit of Shanghai AutoMuseum, autonomous driving and the visit of homologation laboratory. The mission concluded with a farewell dinner at the former Luxembourgpavilionof theWorldExpo Shanghai 2010, which was a symbolic moment to sharewith the delegation. China, the world's second largest eco- nomy by nominal GDP and the largest economy by purchasing power parity (PPP), remains Luxembourg's 17th most important trade partner worldwide (and second inAsia), despite the geographical distance. This Official Trade mission aimedtoofferaplatformforLuxembourg andChinesecompaniesforexploringand strengthening partnerships. This Official Mission to China involved many co-organisers from Luxembourg Trade and Invest, such as the Embassy of Luxembourg in Beijing, the LTIO office (General Consulate) in Shanghai, the Luxembourg Ministry of Foreign and European Affairs, the Luxembourg Ministry of the Economy, as well as Luxinnovation.Throughthismission,the Chamber ofCommercehas reinforced its partnership with the China Council for the Promotion of International Trade (CCPIT) that was launched back in 2019. CCPIT, also known as the China ChamberofInternationalCommerce,isa national agency dedicated to promoting foreign trade and investment. Source:ChamberofCommerce New opportunities for collaboration between China and Luxembourg ©ChamberofCommerce By Camila CALDERON, Partner & Eduardo ISIDRO, Senior Manager, International Tax and Transaction Services, EYLuxembourg T he global tax landscape is in fluxwith theOECD’s release of the Pillar Two Model Rules and their on- going adoptionworldwide. These rules aimto ensure that multinational enterprises (MNEs) pay at least a 15% tax rate in each of the ju- risdictionswhere they operate, targeting base ero- sion andprofit shifting.As per theModel Rules, if the effective tax rate (ETR) in a particular jurisdiction is below15%, the so-called “top- up tax”will be levied. However, en- titieswithin anMNE groupmay face a situationwhere, due to a combination of how the jurisdictional ETR is determined andhowcharging provisions are applied, tax liabilities under Pillar Two potentially bear taxes that economically shouldbe attributed to other entities or shareholders in cases of partial ownership. Pillar Two at a Glance TheGlobalAnti-BaseErosion(GloBE)Rulesintroduce two main components: the Income Inclusion Rule (IIR) and the Undertaxed Payments Rule (UTPR). These rulesmandate a top-up taxwhen the ETR in a jurisdiction falls below 15%. The IIR, generally charged in the jurisdiction of theUltimate Parent En- tity(UPE),appliesonatop-downbasis.WhentheIIR is insufficient, theUTPRacts as a backstop, requiring Constituent Entities (CEs) in implementing jurisdic- tionstoadjusttheirtaxexpensetomeetthetop-uptax amount allocated to that jurisdiction. Additionally, the GloBE Rules allow for an optional domesticruleforcountriestoimposeaQualifiedDo- mesticTop-upTax (QDMTT) locallybefore the IIRor UTPRapplies, ensuring thatMNE income is taxedat theminimumrate domestically. IIR is levied by the parent jurisdiction in an amount necessary to top-up the tax of foreign subsidiaries andbranches to theminimum15%effective tax rate. QDMTT allows the top-up tax to be collected in the otherwise low-tax jurisdiction, as opposed to being collected by the parent jurisdiction on income earned in the low-tax jurisdiction. UTPR acts as a backstop mechanismwhere the parent jurisdiction does not impose top-up tax under an IIR. These are the GloBE charging provisions. In all cases, the ju- risdictional ETR is calculated by aggregation of the GloBE income andcovered taxes—asdefined in the GloBERules—of all the entities/vehicles considered to be in such a jurisdiction. In other words, the ETR is calculated based on a blended approach. Scenarios Leading to UnwarrantedTop-upTaxes This article explores tax allocation rules under Pillar Two, where tax liabilities arise in entities which— on an isolated basis—would not trigger a top-up tax but that would be subject to top-up tax due to the blended approach for the computation of the jurisdictional ETR or because of the charging pro- visions included in the GloBE Rules. The easiest example is that of a “high tax” UPE li- able to pay a top-up tax in relation to a “low tax” CE in another jurisdiction through the application of the IIR.Another one is that of a “high-tax” CE li- able to pay QDMTT because of a “low-tax” CE in the same jurisdiction after jurisdictional blending. These scenarios can result in a top-up tax to be borne by entities that are not actually low-taxed themselves. In the examples described above, the mismatches are triggered by the different charging provisions of thePillar TwoGloBERules.However, this is not the only circumstance inwhich these de- viations could be triggered. One other situationwould be a sub-group that is not 100%ownedbytheultimateparententity.Infact,the primaryIIRchargingprovisionintheGloBErulesap- pliesattheleveloftheUPEoftheGroup.However,if a partially owned parent entity (POPE) owns—di- rectly or indirectly—more than 20% of the interest in any of the entities of the UPE Group, IIR is first payablebysuchPOPE(i.e.,thepar- ent entity of a sub-group). How- ever, the blending approach underlyingPillarTwomayresultin a situationwherea top-up tax is trig- geredbylow-taxedCEsthatarenot part of the POPE sub-consoli- dated group but 100% heldby theUPE. The Pillar Two Model Rules, which are by now widely adopted, do notaddressthetreat- ment of a recharge of taxes between entities, raising concerns about fairnessandtherecovery of excessive tax payments. Challenges forMultinationals andTax SharingAgreements as a Potential Solution The OECD Pillar Two Model Rules, while aiming for fairer taxation, can lead to top-up taxes thatmis- align with anMNE Group’s economic activities or ownership structures. MNEs should be well-in- formed and ensure that top-up taxes align with ownership structures. Entities with tax liabilities should seek advisory support and consider options for correct tax alloca- tion and cost management. MNEs have identified a need for a mechanism of compensation between entities to address the mis- alignment of economic activities and tax liabilities. To address thesemisalignments,MNEs are consid- ering tax sharing agreements (TSAs), i.e., intercom- pany contracts that equitably distribute tax obligations among related parties. A TSA, being an intercompany agreement, is sub- ject to relevant jurisdictions’ transfer pricing re- quirements. Corporate Tax and Pillar Two Implications of TSAs TSAs are not explicitly addressed in the Pillar Two rules or OECD Guidance, and, to our knowledge, there is no specific country legislation that regulates the allocation of top-up tax liability between entities of the MNE group, except in the case of QDMTT. ThisleavesthetaxtreatmentofTSAshighlydepend- ent on their design and the tax laws of the relevant jurisdictions. Depending on the country, recharges triggeredbyTSAsmaybe classifiedas taxableor ex- empt income, deductible or non-deductible ex- penses, dividend income, or capital contributions. In the absence of harmonized guidelines under the Pillar Two GloBE rules, the treatment of TSAs can vary significantly across jurisdictions and is influ- enced by the specific charging provisions applica- ble in each jurisdiction. Additionally, some countries may base their approach on how recharges—whether income or expenses—are ac- counted forwithin the group. Froma technical per- spective, recharges agreed betweenCEs within the same jurisdictional QDMTT framework could be treateddifferently compared to recharges of an IIR. In the latter scenario, the tax liability may fall on a single entity—such as the UPE, POPE, or other holding entity—and is not shared, at least from a purely legal standpoint, with the low-taxed CEs even though the IIR arises as a result of these CEs being low-taxed. This distinction highlights the complexities that multinational groups face when navigating the intersection of TSAs and the evolv- ing Pillar Two landscape. TSAscanalsoraisesignificantaccountingissues,par- ticularlywhendeterminingwhichentity’sstandalone accounts should record top-up tax liabilities. In con- solidated sub-group reporting, TSA effects are typi- cally eliminated for entities within the consolidation perimeter. However, this treatmentmaydifferwhen aTSAisimplementedwithaCEoutsidethesub-con- solidation scope.Whether the recharge is recognized as tax or other expense/income depends on the rules defining the entity legally liable to the top-up tax and the specific provisions of the TSA. Thesamecomplexitiesariseonastandalonebasis,de- pending on the applicable charging provisions and the specific terms andconditions of the relevant TSA. The accounting treatment of TSA recharges in both standalone and consolidatedfinancial statements is crucial. These entries formthe foundation for calcu- latingGloBE Income andCoveredTaxes, impacting not only taxable income for domestic corporate in- come tax purposes but also the jurisdictional ETR. As such, understanding the nuances of TSA ac- counting is essential for ensuringaccuratePillarTwo compliance andeffectivemanagement of global tax obligations. As tax regulations evolve, ongoing dialogue and analysis are essential to refine the Pillar Two frame- workandensureitsfairapplication.Collaborationbe- tween the OECD, tax authorities, and MNEs is vital tobalancepreventingtaxavoidancewithmaintaining an equitable tax system that accurately reflects gen- uine ownership structures and economic activities. MNEs are encouraged to seekprofessional adviceon howtoaddressthechallengesandopportunitiespre- sented by the Pillar Two rules to ensure compliance and address their tax positions. Addressing UnwarrantedTop-upTaxes: Exploring Strategies and Navigating Challenges forMultinationals under PillarTwo